Will ramped-up annuities come back to bite insurers – again?

Nationwide Financial Services Inc. yesterday bumped up its variable annuity living benefits, signaling a return — for some carriers — to the generous benefits that backfired on insurers when the stock market imploded in 2008.
Nationwide, which never stopped offering its 10% annual roll-up, said that would it raise the payouts for its Lifetime Income Rider. Customers between 65 to 80 would see their payouts increase to 5.25%, from 5%, while those over 81 would have their income rise to 6.25% from 6.0%.
Nationwide Financial is not alone in boosting its VA benefits. Other insurers looking to sweeten their variable annuity offerings include Pacific Life Insurance Co., whose newly released CoreIncome Advantage5 comes with a withdrawal benefit of 5%. Likewise, MetLife Inc. has lowered the fee (for people 69 years old or younger) on its enhanced death benefit.
Carriers have been down this path before. From 2004 to 2007, the race for market share led insurers to offer complex guarantees. But those guarantees came back to bite some carriers when the stock market plummeted, as the value of many variable annuity accounts fell below the value of the guaranteed benefits.
Spooked, some companies exited the VA market. Others reassessed, with many raising fees and cutting back on overly generous benefits.
Now, that seems to be changing. Indeed, this new round of benefit-boosting is a “cautious” about-face from the industry’s attitude since the 2008 market decline, noted John McCarthy, vice president of Advanced Sales and Marketing Corp., an annuity research firm.
“There are a few early examples of the pendulum’s swinging in the other direction,” he said of the changes. “It doesn’t seem widespread, but there are bits and pieces being tweaked.”
It’s not clear what those tweaks will mean to insurers. Market volatility is the big bugaboo for VA vendors. Generally, sizable swings in stock prices make it more expensive for carriers to purchase contracts that help them mitigage losses. Falling interest rates, which drive down returns on fixed-income investments, are also a concern.
But Eric Henderson, senior vice president of individual investments for Nationwide Financial, said that recent improvements on both fronts have clearly eased some insurers’ concerns about their VA offerings. “Conditions aren’t as good as they were three years ago,” he granted. “But they’re better than they were a year-and-a-half ago.”
Even then, some insurers seem to be hedging their bets. While MetLife lowered its fee for some on its customers who have enhanced death benefits, the company raised the fee for people between 70 and 75 years of age.